Both the House and Senate have approved and President Obama signed into law the American Taxpayer Relief Act (the Act). The bill, approved to avoid the “fiscal cliff,” brings with it major increases to high income earners. The measure would raise taxes by about $600 billion over 10 years. The major provisions of the Act are highlighted below:
Income tax rates – The income tax rates will remain the same as 2012 for all taxpayers with incomes less than $400,000 for individuals and $450,000 for couples. Earnings above these amounts will now be taxed at 39.6% instead of the current 35%.
Phase out of deductions – The phase-out of itemized deductions and personal exemptions have been reinstated starting in 2013 for incomes over $250,000 for individuals and $300,000 for couples.
Capital gains tax and dividends – The maximum long-term capital gain and dividend rates will increase to 20% if your income is more than $400,000 for individuals and $450,000 for couples. For all other taxpayers, the capital gain and dividend rates will remain the same as 2012 rates.
Alternative minimum tax – The Act permanently fixes the alternative minimum tax exemption and indexes it for inflation. This will favorably impact more than 30 million taxpayers for 2012 and beyond.
Estate/gift tax – The estate/gift tax rate of 35% has been increased to 40% effective Jan. 1, 2013. However the lifetime exemption amount of $5,000,000 was made permanent and indexed for inflation. In addition, the estate and gift tax provisions are now permanently unified. This means that the lifetime exclusion amount for 2013 will be $5,250,000 for both estate and gift tax. Portability was also made permanent.
Tuition and education – The American Opportunity tax credit for education was extended for five years. The above-the-line deduction for tuition was extended through 2013. The $250 deduction for teachers’ classroom expenses were extended through 2013.
State and local sales tax deduction – The option to deduct state and local sales tax in lieu of state and local income taxes was extended through 2013.
Charitable contribution from IRA – The Act extends the charitable contributions from your IRA for 2012 and 2013 for people over 70½. However, since 2012 already passed, the Act allows an individual to treat distributions taken in December 2012 and January 2013 (and given to the charity before Feb. 1, 2013) as deemed to have been contributed to the charity on Dec. 31, 2012.
Social Security payroll tax cut – The reduction of social security tax withholding has now expired. The former 2% reduced rate of 4.2% reverts back to the 6.2% rate effective Jan.1, 2013.
Additional Provisions – Relief from cancellation of debt income for personal residences, parity for employer provided mass transit benefits, deduction for mortgage insurance premiums as interest and certain energy credits including energy efficient credit for existing homes were all extended through 2013.
These changes are in addition to .9% on wages in excess of $200,000 ($250,000 joint) and 3.8% Unearned Income Medicare tax increase from the Affordable Care and Reconciliation Acts of 2010 on the lesser of the taxpayer’s net investment income for the year or the excess of modified adjusted gross income over $200,000 ($250,000 joint). For purposes of this tax the following are considered investment income: interest, dividends, annuities, royalties, rent and income from passive trades or business. The 3.8% tax applies to individuals, estates and trusts. Both are effective beginning in 2013.
Depreciation – The 50% bonus deprecation has been extended through 2013. The Sec. 179 deduction limits were increased to $500,000 with a $2,000,000 phase-out threshold. Qualified leasehold improvements are eligible for the Sec. 179 deduction (up to $125,000). They can be depreciated over 15 years, and are also eligible for 50% bonus deprecation. These changes were retroactively extended for 2012 and 2013.
Research Credit – The R&D credits were retroactively extended for 2012 and 2013.
Work Opportunity Tax Credit – This credit was extended through 2013.
Certain Energy Credits – Alternative fuel vehicle refueling property credit, biodiesel and renewable diesel incentives, wind credit, energy efficient credit for new homes, and credit for manufacture of energy efficient appliances were all extended through 2013.
S Corp Built In Gains – The built-in gains tax recognition period was changed from 10 to 5 years for sales occurring in 2012 and 2013.
We will be sure to keep you informed as there are further developments. In the meantime, if you have any questions or would like more information, please contact us for more information or so we may discuss how these changes directly impact your personal situation.